ERISA Litigation Newsletter

In October 2012, a defined benefit plan sponsor amended its plan to provide that, effective Dec. 7, 2012, the plan would purchase an annuity to cover the plan’s obligations to make payments to the roughly 41,000 participants who were receiving benefit payments as of Jan. 1, 2010.  Prior to amending the plan, the plan’s fiduciary had retained an independent fiduciary to opine on such a proposed transaction. Before the company amended the plan, the independent fiduciary “provided a written determination of the transaction’s compliance with ERISA.” The sponsor then purchased a single-premium, group annuity contract for $8.4 billion, in settlement of $7.4 billion in plan benefit obligations.

Procedural Posture

Participants of the plan, both those retirees whose pension obligations were transferred to the insurer and participants whose obligations remained with the company, sued the sponsor and certain plan fiduciaries in the District Court for the Northern District of Texas, alleging breach of duty with respect to the transaction. The plaintiffs first sought a temporary restraining order to enjoin the transaction, which was denied. The district court then granted motions to dismiss both the original complaint and an amended complaint. The plaintiffs appealed the dismissal of their claims.

In a per curiam decision, a panel of the Fifth Circuit Court of Appeals affirmed the dismissal of all of plaintiffs’ claims.

No Failure to Disclose

The court first addressed plaintiffs’ claims that the plan’s summary plan description (SPD) did not disclose, prior to plan’s amendment, that the plan’s benefit obligations could be transferred to an insurer via an annuity. It rejected this basis of liability given that an SPD does not need to describe future terms and, in any event, the SPD had identified that the plan could be amended. The court also noted that participants were, in fact, notified of the plan amendment shortly after it was effectuated. The court also rejected plaintiffs’ arguments that the SPD needed to disclose the loss of possible benefits given that the amendment did not reduce the amount of benefits and the loss of ERISA protections is not a loss of benefits, especially where the transaction complied fully with the regulation governing the purchase of annuities.

No Breach of Duty in Implementing the Plan Amendment

The court also affirmed dismissal of the retirees’ claims of breach of fiduciary duty on a number of grounds. For one, the act of amending a plan is not a fiduciary function, and therefore not subject to ERISA’s fiduciary standards. Further, the court observed that, since all the elements of the regulation were met (benefits are guaranteed by and enforceable against the insurer, and proper notice was provided), the retirees were no longer participants of the plan entitled to enforce fiduciary obligations.

The court also affirmed dismissal of claims addressed to plan fiduciaries for implementing the plan amendment, holding that there was no obligation to obtain to obtain the consent of participants or notify them before the plan sponsor amended the plan. Similarly, the court held that, in light of a Department of Labor advisory opinion allowing reasonable expenses to be borne by the plan, “threadbare allegations” that $1 billion was not reasonable in connection with $7.5 billion of pension obligations did not state a claim that the plan fiduciaries improperly allowed the plan to pay the costs of implementing the plan amendment. Finally, the court held that there was no violation of duty by selecting only one annuity provider as opposed to multiple providers, given that the plaintiffs did not plausibly allege a deficient fiduciary process in arriving at that result.

Other Claims Also Rejected

The court also denied other challenges raised by plaintiffs. It held that the transfer of some plan obligations was not an unlawful interference of participants’ rights under ERISA Section 510 absent any allegation of an intent to interfere with a right under the plan. The Court also held that the remaining 50,000 or so participants in the plan for whom the plan did not purchase an annuity did not have constitutional standing to challenge the transaction. While those participants alleged that they suffered harm, in that the plan was underfunded as a result of the transaction at approximately 66% of the actuarial funding, since they alleged no direct harm, they could not maintain their suit. They also could not sue on behalf of the plan where there was no assignment by the plan of any cause of action to them.

The plaintiffs, three plan participants, filed their lawsuit in 2012 and purported to assert claims on behalf of a class of all plans serviced by the defendants, affiliated entities that provided services to the plans and/or their investments. The complaint alleged that the defendants breached ERISA fiduciary duties and engaged in prohibited transactions by charging excessive fees.

Specifically, the plaintiffs asserted that the fees the defendants assessed to the insurance company separate accounts offered to client plans as investments were excessive because the separate accounts invested in publicly available mutual funds and the defendants provided no services on such accounts. The plaintiffs further alleged that the defendants did not use their institutional leverage to invest plan assets at the lowest price share class of mutual funds, and that the defendants engaged in prohibited transactions. 

Early in the case, the district court had denied the defendants’ motion to dismiss on the ground that the complaint adequately pleaded that the service provider was an ERISA fiduciary with respect to its fees because it had contractual rights to modify its fees or make investment changes that would affect its compensation. 

In denying the motion for class certification, the court held that, while the plaintiffs had satisfied their burden under Federal Rule of Civil Procedure 23(a), they had failed to demonstrate that a class could be properly certified under either Rule 23(b)(1) or 23(b)(3). 

The court held that certification under Rule 23(b)(1) is only appropriate in cases in which the rights to some limited quantity of money are being adjudicated, and the adjudication of the rights of one individual would necessarily decrease the pool available for other claimants. Where the proposed class here included multiple plans, the adjudication of one plaintiff’s claim would not necessarily affect all class members.

The court further rejected certification under Rule 23(b)(3), which requires the plaintiffs to demonstrate that questions common to the class predominate over questions affecting only individual members. The court held that individual issues about the reasonableness of the total fees paid by each plan as compared to the expense of providing services to such plans would predominate the litigation, and that a class action would be so unwieldy as to not be the superior method of adjudication. The court further held that the plaintiffs’ allegation that the defendants had failed to provide an accurate accounting of fees was likewise not susceptible to class treatment, because the court would be forced to inquire into what plan sponsors or participants knew and when they knew it, which would require “thousands of separate inquiries.”

Fiduciaries of two defined contribution retirement plans sponsored by the same employer (the “Plans”) sued the Plans’ former investment manager for breach of ERISA fiduciary duties and state law violations in connection with the transfer of the Plans’ assets from a pooled employee benefit plan trust (the “Combined Trust”) to a separate trust for the Plans in November 2008. In essence, the plaintiffs alleged that the defendants, the Plans’ designated investment manager and the entity’s sole executive, failed to assure that the Plans’ assets would be invested as they had been under the Combined Trust. Instead of using the same percentage investment allocations as had existed under the Combined Trust, the defendants allegedly invested the Plans’ roughly $38 million in assets in a non-diversified pool, 97% of which was invested in 13 energy sector equities.

The defendants did not liquidate the equities until March 2009. The defendants proposed to reinvest the cash in mortgage-backed securities in May 2009, a proposal that was rejected by the Plaintiffs. Plaintiffs terminated the defendants in May 2009, and replaced them with an investment consultant that provided a recommendation to the fiduciaries in July 2009 to invest the Plans in a mix of equities, bonds, and cash, a recommendation that was implemented in July 2009. The Plaintiffs sued on Feb. 5, 2010.

Trial Decision

After a two-week trial in July 2014, the District Court for the Southern District of New York (Judge Taylor Swain) issued its decision on Aug. 10, 2015. It found that the defendants were liable for breaching ERISA fiduciary duties by not following the instructions to invest the Plans in the same proportion as the Combined Trust, and for not diversifying the Plans’ assets. It held that the defendants were fiduciaries for providing investment advice for a fee under the Department of Labor’s current five-part test.  It held that the defendants breached their fiduciary duties of not diversifying plan assets, holding that even if the defendants could not—as they asserted at trial—effect the diversification, at minimum, the defendants should have raised to the Plans’ fiduciaries any delay in the process of diversifying the Plans’ assets.

Damages

After holding that the defendants were liable for breaching their fiduciary duties to the Plans, the court turned to the amount of damages. The court looked to the diminution of value of the Plans during the time of the breach, and also the lost earnings that the Plans could have obtained. The plaintiffs’ expert had identified four measures for the returns that the Plans could have obtained if invested in a proper manner.

The amounts included a high of $9.6 million had the Plans been invested as they were in the Combined Trust, $7.7 or $8.6 million had the Plans been invested as the successor investment consultant recommended in July 2009 (one measure accounting for a transition period in cash), and a low of $5.9 million based on a diversified 60-40 equity-fixed income split appropriate for a population with the demographic characteristics of the Plans.

Following the Second Circuit approach set forth in Donovan v. Bierwirth, 754 F.2d 1049 (2d Cir. 1985), the court observed that the proper measure of damages would be to “presume that the funds would have been used in the most profitable” of the “plausible” alternatives, with “[t]he burden of proving that the funds would have earned less than that amount [placed] on the fiduciaries found to be in breach of their duty.” The defendants were unable to meet that burden given evidence that the Plans could have been invested in comparable ways as the Combined Trust.

Applying that standard, the court awarded the plaintiffs $9.6 million, which was inclusive of the $4.7 million diminution in value and the lost earnings. It also awarded disgorgement of the defendants’ management fees, and pre-judgment interest from 2009 at the New York rate of 9%. The 9% rate was used based on the parties’ agreement to be governed by New York law insofar as it was not preempted.